Monetary policy

Straight talk

Today, to achieve a better path for the economy over time, a central bank may need to commit credibly to maintaining highly accommodative policy even after the economy and, potentially, inflation picks up. Market participants may doubt the willingness of an inflation-targeting central bank to respect this commitment if inflation goes temporarily above target. These doubts reduce the effective stimulus of the commitment and delay the recovery.

To “tie its hands,” a central bank could publicly announce precise numerical thresholds for inflation and unemployment that must be met before reducing stimulus. This could reinforce the central bank’s commitment to stimulative policy in the future and thus enhance the stimulative impact of its policies in the present, helping the economy escape from the liquidity trap.

From our perspective, thresholds exhaust the guidance options available to a central bank operating under flexible inflation targeting.

If yet further stimulus were required, the policy framework itself would likely have to be changed. For example, adopting a nominal GDP (NGDP)-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting. This is because doing so would add “history dependence” to monetary policy. Under NGDP targeting, bygones are not bygones and the central bank is compelled to make up for past misses on the path of nominal GDP...

Bank of Canada research shows that, under normal circumstances, the gains from better exploiting the expectations channel through a history-dependent framework are likely to be modest, and may be further diluted if key conditions are not met. Most notably, people must generally understand what the central bank is doing - an admittedly high bar.

However, when policy rates are stuck at the zero lower bound, there could be a more favourable case for NGDP targeting. The exceptional nature of the situation, and the magnitude of the gaps involved, could make such a policy more credible and easier to understand.

As Mr Carney explains early in the speech, his talk is about guidance and not intended to provide guidance about future policy. For so prominent a central banker to speak so clearly to the issue is nonetheless important.

As I've written before, I'd much prefer that good policy trickle up through the central banking world than good central bankers. The Bank of England is by no means a minor league central bank. Yet were NGDP level targeting to be successfully implemented in Britain, its adoption in larger economies, like America and the euro zone, would be made much easier and more probable. This is encouraging stuff.

We are still in a deflationary environment when it comes to real wages which means that the real cost of debt is increasing. Lax monetary policy is the only monetary cure to achieve house price inflation and wage inflation, allowing consumers to start accumulating more stuff to put in storage units. Another approach would be to increase the minimum wage by 30% offset with a decline in the dollar vis a vis its major trading partners in manufactured goods. Since that isn't going to happen, this monetary policy is the only game in town. Don't expect them to announce this though.

Business executives of the world: Unite! Do not hire anyone! At long as unemployment is kept high, we'll get the low interest rate that we all want. Cheap money not only makes it easier to turn a profit, it keeps stock prices artificially high. Fools wanting to save their hard-earned dimes have no other option but to buy equity. While they earn a pitiful return, our stock options are worth far more. Many of us have bonuses triggered by stock prices too. And high stock prices makes it hard to mount a hostile takeover. Easy money plus job security--a cheap dollar can kill many a birds. So don't ruin it, my dear super-rich comrades. Don't hire a soul on US soil. Keep zero interest rate policy alive forever! I know that we all individually want to increase our profits, but there are many ways other than hiring American workers. Look beyond the borders, dear comrades. Borrow cheaply at home and invest oversea. There are people in Hong Kong who will give you 8% for the money you get at 2. You don't have to do a thing. And the profits won't be taxable either. That's an added incentive for those of us with an axe to grind against them leeches back at home.

As they always used to say at school if you cant say anything sensible say something stupid so here goes.
Kinda see why it would better so that be real inlfation target rather than the constantly changing ones which does not correct for previous ones with year targets that do not then try and get back to what would have been if previous year target meet.
I supose would be more confidence if kept to these more ridgid in a sense targets if actually could manage it.
If going to have targets more than year then should be done this way as otherwise be kinda meanless. However can not help but think the interest rate maniplation as inflations controls etc all a bit in the direction of soviet like setting other prices etc not really governments role to set interest rate any more than price of hats. led to undersupply. Dont really feel these government price controls any more than setting the price for a cookie or a pint or indeed a pint of best.
To be even sillier now
If going to have soviet type targets and soviet type interest rate maniplation then should be ngdp as other wise can get completly of course I supose would seem more consitant with montarism to have ngdp targets.